The
New York Times
November 13, 2007
After Fires,
Homeowners Feel an Insurance Pinch
By
SOLOMON
MOORE
LOS ANGELES,
Nov. 12 — Daniel and Doris Okonsky, whose custom-built
6,500-square-foot house was destroyed in the recent wildfires in Southern
California, have been poring over receipts and family photos to
estimate the damage.
But like many
of the 14,000 homeowners who suffered losses, the Okonskys are
discovering that the insurance on their hilltop home in
San Diego
County
might not be enough to rebuild it.
“I have
about $1.5 million coverage for dwelling only,” Mr. Okonsky said,
or the equivalent of about $230 per square foot of construction.
“For custom-home construction I am getting prices like $350 up to
$500 per square foot.”
As
Californians recover from another season of devastating wildfires,
one of the biggest obstacles is a painfully familiar one. As many as 40 percent of homeowners statewide lack enough
insurance to cover their home-replacement costs, according to
the California
Department of Insurance, and most realize the problem only when it
is too late.
After past
disasters,
California
state officials tried to raise homeowners’ awareness of their
coverage limits by requiring policies to be written clearly and with
disclaimers about what is not covered. But several national studies
suggest that many homeowners tend to underestimate risk and do
not understand that their policies do not guarantee replacement of
their homes.
“Most
Americans still think that full coverage means full coverage, but
insurance companies know otherwise,” said Douglas Heller,
executive director of the Foundation for Taxpayer and Consumer
Rights, an advocacy organization.
Guaranteed
home-replacement policies have become increasingly rare in
California
since the 1990s, when a series of catastrophic earthquakes and
wildfires sent insurers’ profits plummeting. Most
California
policies have limits on construction, although some include
inflation riders or extension policies to create buffers beyond the
estimated replacement price.
An analysis
by The San Diego Union-Tribune of 2,137 houses that were destroyed
in unincorporated areas of
San Diego
County
in the last big
wildfires, in 2003, found that only 46 percent had been rebuilt by
late last year. In many cases, policyholders said they had
not resolved their insurance claims or received enough money to
replace their homes, The Union-Tribune reported.
Insurance
industry officials say many
homeowners contribute to the problem of insufficient coverage. In
seeking to keep premiums low, the officials said, homeowners often
do not inform their insurers about renovations, opt out of adequate
coverage or fail
to update their policies.
Some public
opinion surveys back up that notion. A Mason-Dixon poll on attitudes
about flood insurance in coastal areas, for example, suggested that
many homeowners often opted out of recommended disaster coverage and
only rarely reviewed their policies.
Half of the
homeowners polled in flood zones, according to the poll released in
May, incorrectly believed that standard residential insurance
policies covered flood damage and a
third of homeowners had not reviewed their policies in more than
three years.
A separate
study by the RAND Corporation, a research group, concluded that only
about half of homeowners living in high-risk flood zones throughout
the nation had flood insurance policies.
Robert P.
Hartwig, president of the Insurance Information Institute, a trade
group, said, “The
principal cause of underinsurance is the failure to report
improvements to the home to the insurance company, and it’s a
common problem.”
But John
Garamendi, the
California
lieutenant governor who served two terms as the state’s insurance
commissioner, has placed much of the blame on the insurance
companies. At a news conference earlier this year, Mr. Garamendi
said that “lack of clarity in the language” of policies was a
main reason that homeowners had insufficient insurance. He also said
that, in some cases, insurance agents and insurance companies
“were giving bad information to the consumers.”
But Mr.
Hartwig disagreed. “That is a figment of John Garamendi’s
political imagination,” he said. “Garamendi doesn’t seem to
remember that he’s not the insurance commissioner any more.
There’s no evidence of that. There’s no report from any state
agency that suggests that’s the case.”
Jim Wells,
president of Marshall & Swift/Boeckh, a firm that estimates
construction costs for many large insurers, said insurance companies
had improved the models they used to estimate replacement costs. But
many of the companies, Mr. Wells said, did not take the next step
and contact homeowners who held policies written with older, less
accurate information.
“Sometimes
the insurance companies believe their agents have that
responsibility,” Mr. Wells said. “Sometimes it is an expense
they’re not ready to bear even though it pays for itself in higher
premiums. Sometimes it’s just not the way they did business in the
past, and sometimes they think it’s the policyholders’
responsibility and not theirs.”
In the meantime, the cost of rebuilding a house
keeps going up.
The Census
Bureau estimates that residential
construction costs in the Western states were 35 percent higher in
2006 than in 2003. Much of that increase was caused by
growing international demand for materials like copper, steel and
concrete, and high gasoline prices, industry experts said.
Bob Rivinius,
president of the California Building Industry Association, said the
housing construction slump that has followed the subprime mortgage
crisis might help keep prices in check. Still, Mr. Rivinius said,
construction prices are likely to remain relatively high because of
California
’s fast-growing population and slow-growing housing stock.
Mick
Pattinson, president of Barratt American Inc., a privately held,
$250 million-a-year residential building firm based in
Carlsbad
,
Calif.
, said that average construction prices in the state ranged from
$130 to $200 per square foot. Palatial custom-built houses like many
lost on bluff-tops in the Rancho Bernardo neighborhood of San
Diego and neighboring
Poway
could cost as much as $400 to $500 a square foot, industry experts
said.
John and
Madeleine Bera, a recently retired couple whose house was among 14
that burned down on their block in Rancho Bernardo, were nearing the
end of their 30-year mortgage and had plans to spend time
sightseeing along the East Coast.
Instead, the
Beras, both in their 70s, have been taxing their memories trying to
recall the stained-glass windows they collected, each piece of
imported furniture, and rare, first-edition books so that they can
better negotiate with their insurance company. “This isn’t what
we planned on doing with our retirement,” Mr. Bera said.
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